‘Just the Way Business Works’

Matthew Continetti

October 24, 2011, Vol. 17, No. 06

Of the many lame excuses used by the Obama administration to explain why the Energy Department extended a $535 million loan guarantee to the troubled solar panel manufacturer Solyndra in 2009, then gave the firm more money in 2010 after it had technically defaulted on the initial loan, then changed the terms of the agreement (perhaps illegally) so that private investors would be remunerated before taxpayers in the event of bankruptcy, and continued to support the company right up to its collapse, one claim is especially revealing. Far from exposing the problems inherent in government interference in the market, White House officials say, Solyndra is actually a textbook example of how capitalism should work. Sometimes investments pan out, sometimes they don’t. You win some, you lose some.

“There are no guarantees in the business world about success and failure,” lectured White House press secretary Jay Carney in September. Carney, whose knowledge of the business world comes from 20 years as a journalist and a few as a press flack, added, “That is just the way business works, and everyone recognizes that.” Former White House chief of staff Rahm Emanuel, now mayor of Chicago, who has spent a whole two and half years in the private sector, told a Chicago radio station last week, “Like venture capital, sometimes you’re right, sometimes you’re wrong, and that’s unfortunate. Nobody takes losing money easily.” And President Obama, who disliked his post-college year at a consulting firm so much he wrote in his autobiography that it made him feel “like a spy behind enemy lines,” said in his October 6 press conference, “There were going to be some companies that did not work out. Solyndra was one of them.”

See? Wasting hundreds of millions of taxpayer dollars, bending the rules to favor client groups, disguising rent-seeking and self-dealing behind an environmentally friendly green banner—“that is just the way business works.” No big deal.

Except it really is a big deal, and one that shows no sign of shrinking soon. The administration’s line of argument is therefore illuminating in two ways: It shows how little the men operating the federal government know about free enterprise. And it implies, quite unintentionally, a familiarity and comfort with a system of relations between the public and private sectors that makes most Americans blanch—and drives some into the streets.

The fact that the president and his senior staff poorly grasp the distinction between private capital and taxpayer guarantees is nothing less than depressing. For the umpteenth time: When an investor risks his own money on a company, he is the only one that loses if the company goes belly-up. Yet when the government backs a firm, it privatizes any gain while socializing the risk. If Solyndra had been a big success, investor George Kaiser—who also happens to be a major Obama fundraiser—would have added to his already considerable fortune. But Solyndra failed, and the American public is on the hook for the loss.

Whatever Carney, Emanuel, and Obama may say, the economic and political system in which government uses public resources massively to “invest in” or bail out private firms is not free market capitalism. When government allocates capital, whether to Solyndra or GM or Chrysler or AIG or Fannie Mae or Freddie Mac or Goldman Sachs or Citigroup, the market is inevitably distorted. And the more enmeshed the government becomes, the less our politics and economics resemble anything that Adam Smith or even J. M. Keynes would support.

Call it what you will—crony capitalism, venture socialism, Stamokap (for “state monopoly capitalism”) in Lenin’s catchy phrase. The names all describe a set of interlocking relationships by which interchangeable government and financial elites use politics to direct favors and investment to their friends. And these relationships make a parody of the ethic of individual responsibility, entrepreneurial risk-taking, and free enterprise we should want our society and culture to embody. Yet this very parody is precisely what the president and his lieutenants mistake for “venture capital.” No wonder they’re confused.

Trading access for wealth, after all, is exactly how Rahm Emanuel made a small fortune a decade back. Looking for a way out of the scandal-ridden Clinton White House, Emanuel used his connections to secure a job at the Chicago office of Wasserstein Perella & Company, an investment bank whose chairman was a major Democratic fundraiser. During Emanuel’s time there, from 1999 to 2002, he made more than $18 million working on eight deals. In 2001, for example, he helped broker the sale of home alarm company SecurityLink from SBC Communications, the former (and future) AT&T, to private equity firm GTCR for $479 million. On the other side of the deal was Bruce Rauner, a Republican banker who would later support Emanuel’s successful mayoral candidacy and is now reportedly thinking of entering politics himself. Later that year, the then-chairman of SBC (and future interim GM CEO) Ed Whitacre announced that one William Daley—brother to the mayor of Chicago, former secretary of commerce, and now the White House chief of staff—would become the telecom firm's president.

There was nothing illegal or corrupt about Emanuel’s time at Wasserstein Perella, we hasten to say. He was risking no one’s money but his clients’. But it does not take too large a conceptual leap to see how Emanuel’s short but happy private-sector career would later serve as a template for the Obama administration’s “investment” strategy. That strategy looks something like this: Connections? Check. Our friends? Check. Let’s deal. And if “some companies” don’t “work out,” well, that’s “a risk” to be borne by the taxpayers. That is “just the way business works.” And “everyone recognizes that.”

In Obama’s America, at least.

*Correction, October 17, 2011: The original version of this piece incorrectly stated that William Daley was the chairman of SBC at the time of SecurityLink's sale to GTCR.